Fidelity Focused Stock (FTQGX) has been a very strong performer. Stephen DuFour has managed Fidelity...
iSectors: Allocating Gold and Precious Metals
03/02/2016 10:00 am EST
All investors should hold a small portion of a diversified portfolio in gold, suggests Chuck Self. The CIO of iSectors discusses his firm’s Metals Allocation model and highlights some of recommended funds within this model.
Steven Halpern: Our special guest today is Chuck Self, CIO of iSectors. How are you doing today, Chuck?
Chuck Self: I’m doing very well, Steve. How are you?
Steven Halpern: Very good, thanks for taking the time. Now, you have over 30 years of experience in the investment management industry and are a noted expert on gold and other precious metals. Before we turn to your allocation model, could you just share a brief overview of your outlook on the gold and metal centers?
Chuck Self: Well, obviously, the whole precious metal sector has a significant decline into the lows that we saw in December, and since then, we’ve had a 17% rise from the lows that have taken place in December. We believe that this is the low in the cycle.
The low has been put in. That and the lower interest rates that we are seeing in the US and around the world helps gold because then there’s very little cost to owning it, very little interest rate cost that is not received because you’re owning it.
And secondly, the dollar seems to have hit its peak, and third, the investors are looking for safe havens here and gold is usually a good safe haven to own during global recessions or global near recessions.
Steven Halpern: Now, your iSectors Precious Metals Allocation model is not a fund in and of itself. Rather, it’s designed to invest in ETFs that in turn hold positions in gold and other metals. Could you help explain the allocation model and this overall strategy for investors?
Chuck Self: You’re right. We work completely with financial advisors and these financial advisors want to be able to diversify their client’s portfolio in a very thorough manner.
The problem with bull markets and equities is that investors get enamored with equities and they end up being not fully diversified across the investment spectrum, so the iSector Precious Metals Allocation model allows advisors to be able to fully diversify into this sector, which has very low correlation with both the equity and the fixed-income models.
We utilize the best closed-end funds and ETFs that we can; and how we define best are the lowest cost that have the most favorable tax situation for taxable US investors and have the highest correlations with the underlying precious metal that it’s supposed to be tracking.
Steven Halpern: Now, looking at individual gold ETFs that you include in your allocation model, you like Central Fund of Canada (CEF) and the Sprott Physical Gold Trust (PHYS). Could you touch on these two gold holdings?
Chuck Self: Sure…and both of these are actually Canadian gold trusts. They’re really not exchange-traded funds, but they’re closed-end mutual funds.
Both of these funds are important for investors to understand why they should be in both of these funds as opposed to the gold ETFs that are issued in the United States or Canada.
And the reason why is because for US tax law gold and silver ETFs are taxed as collectibles, and when a security is taxed as a collectible, then whatever gains you receive end up being 60% long-term 40% short-term capital gains.
By owning the Canadian gold trusts, you’re able to get regular securities manor of tax treatment for your capital gains, so if you hold it longer than 12 months, you could actually get 100% long-term capital gains on the profits that you make on the trust, so that’s the reason why we like the trusts.
The other reason why we like both of these trusts is that they have physical gold that is separate unencumbered that’s only allocated to the funds held in Canadian institutions.
In the case of the Sprott Physical Gold Trust, it’s held at the Royal Canadian Mint, which, of course, is the safest place you could own it in Canada.
But even for Central Fund of Canada, which holds both gold and silver, they’re held at nationally chartered Canadian banks and these are large banks that are safe and well known.
So, the combination of the tax benefit for US taxable investors and where they hold the precious metals make them attractive investments for investors that wish to own gold bullion funds.
Steven Halpern: Now, let’s step away from gold investments. You also like the ETFs Physical Platinum Shares (PPLT) as well as the Physical Palladium Shares (PALL). Could you give our listeners an overview of these metals and why you find this attractive?
Chuck Self: Certainly, gold is the purest safe haven metal. Silver has a combination of safe haven and industrial uses. Both platinum and palladium have a larger percentage of their uses being industrials, and mainly in catalytic converters for automobiles, but they still have a precious metals use in investor’s portfolios.
There are many countries around the world that issue platinum and palladium coins as collectible coins and coins that their citizens can own in order to have a precious metal allocation. Platinum is less than silver, but more than palladium as far as it being a safe haven metal.
Palladium is the lowest safe haven metal net. The vast majority of palladium use is for catalytic converters in gasoline cars. Platinum is used in catalytic converters for diesel automobiles, so it’s a little more susceptible to international sales since the vast majority of international sales occur in Europe.
For both of those metals you not only have to look at the safe haven aspect, but you also got to look at global automobile sales, which look like they’re going to be on an up rise this year.
The US sales, of course, were near term record sales last year, but we expect that. The first numbers in Europe this year have been great and we expect that global auto sales—even it just maintains B flat—will certainly help the prices of both platinum and palladium.
Steven Halpern: Now, we only have a minute, but I’d like to touch one important point. You emphasized that investors should not hold too much of their funds in gold, but rather, you suggest a more moderate position as a way to diversify one’s overall portfolio. Could you expand on that?
Chuck Self: Well, the reality is that over any long period of time equities is the asset class that people should have the majority of their allocations owned to.
It reflects the growth of the US and global economy, and now that we are in a place where even some of the most communist countries like China have capitalistic aspects, we want our financial advisor’s clients to be owning mainly equities.
But in order to own equities you have to be able to go through the down turns, and once you go through the down turns, then you’re able to be able to take the advantage of growth and equities, and how you’re able to go through the downturns is to have diversification, and so that’s why you own fixed-income, but fixed-income itself is not enough diversification.
You have to have some other diversification and precious metals is great because there’s no correlation to equities and fixed-income, and so, at times when the equity market is not doing well and the fixed-income interest rates are low like they are now, it’s good to have a third asset class to help stabilize the portfolio.
But you only want to have 10% to 20% of your portfolio in these metals because you want to be able to take advantage of equities when they rebound.
Steven Halpern: Again, our guest is Chuck Self of iSectors. Thank you so much for your time today.
Chuck Self: Thank you very much Steve.
Related Articles on FUNDS
I think we’re finally seeing the bottom forming in MLPs, which is good news for JPMorgan Aleri...
When we recommended large-blend Parnassus Core Equity Fund (PRBLX) a year ago, what stood out most w...
On November 1, we featured Doug Hughes' recommendation for investment banking firm Oppenheimer Holdi...